The U.S. market seems to be "all good," but traders are still uneasy

Looking at the current market situation in the United States, the outlook seems "very promising": U.S. stock prices continue to hit new highs, supported by the optimistic global economic sentiment, while corporate bonds and commodities remain strong.

However, upon further research, traders have found that the U.S. market still exhibits volatility, which is a major issue across almost all asset classes.

In August and September, market turbulence intensified, leading traders to adopt a large number of hedging measures to manage risks. This resulted in a sharp increase in hedging costs, almost in sync with market fluctuations.

Currently, the options market reflects a strong demand for hedging against a large-scale stock market crash, with the frequency of tail risk hedging strategies reaching rare levels in the past two years. The MOVE index tracking bond market volatility has soared to its highest level since the beginning of the year, while a similar indicator measuring crude oil volatility has also reached its highest level in two years.

Since August, the implied volatility of the iShares iBoxx USD Investment Grade Corporate Bond ETF has risen relative to actual price fluctuations, indicating that traders are paying higher insurance premiums to guard against potential losses.

Concerns about the upcoming U.S. election, the Federal Reserve's policy direction, and recent market turbulence continue to escalate in the market.

While the market is currently calm, past shocks and uncertain future prospects significantly impact market sentiment

Investors hold divergent views on the future economic outlook, with bullish and skeptical sentiments coexisting. The S&P 500 index has risen for multiple weeks in a row, hitting new highs this year, demonstrating market optimism.

However, the memory of the sharp declines in August and September lingers in the market, with the "fear index" VIX reading remaining high. The global cross-asset risk indicator of Bank of America has also reached its second-highest level this year, second only to the market turbulence in early August.

"The likelihood of something really bad happening is higher," said Amy Wu Silverman, head of capital markets derivatives strategy at Royal Bank of Canada. "After the surge in VIX in August, the market has returned to normal and hit new highs. However, the potential 'concerns' remain high."

While the market is currently calm, past shocks and uncertain future prospects significantly impact market sentiment, compounded by Middle East conflicts, the U.S. presidential election, the shadow of the sharp decline in early August, this week's jobless claims data... the market's future remains shrouded in uncertainty.

At the same time, there is a growing sense that the Federal Reserve led by Powell may not be eager to immediately inject fresh vitality into the economy. Data released on Thursday showed consumer inflation higher than expected, and last week's U.S. employment report showed strong performance, leading traders to withdraw bets on the scale of rate cuts in 2024. Atlanta Fed President Raphael Bostic expressed willingness to refrain from further rate cuts next month.

"There is almost a sense of distrust in the market," said Peter Tchir, head of macro strategy at Academy Securities:

"People have a lot of concerns, but the stock market is generally rising. We have experienced several rapid declines."

"Despite some macro and micro risks, the market has been very strong," said Erika Maschmeyer, portfolio manager at Columbia Threadneedle Investments:

"As we approach the peak of the election and the next interest rate decision, we would not be surprised to see a pullback."

"Investors are showing extreme optimism," said Michael O'Rourke, Chief Market Strategist at JonesTrading:

"Valuations are very high. Despite strong economic data, the Fed's aggressive easing stance has fueled investors' excessive confidence."